Costs & Criticisms: The Facts about Disclosure Rules

Congressional leaders signing the Dodd-Frank Wall Street reform bill, July, 2010. Photo: Speaker Pelosi/Flickr

As the U.S. Securities and Exchange Commission (SEC) prepares to issue final rules implementing a new disclosure law for oil, gas and mining companies, industry lobbyists are redoubling their efforts to undermine the measure's impact. How do their arguments match up with facts?

The oil and mining disclosure provision of the Dodd-Frank Act signed into law in July 2010 requires all companies traded on U.S. stock exchanges to make public the payments they make to governments in exchange for natural resources, country-by-country and for each project.

Citizens and governments around the world have recognized this provision, called Section 1504, as a critical step toward greater transparency and accountability in the oil, gas and mining industries. But some companies complain it will cost them too much money and hurt their ability to compete.

Claim: Disclosing payment information will anger governments of countries rich in oil or minerals and force companies to violate confidentiality laws.
Fact: Many governments have publicly welcomed the law, and the European Union and other jurisdictions are planning to set similar disclosure standards. The leading industrial countries that make up the G8 declared their support for mandatory disclosures at their May 2011 summit in Deauville, France.

Meanwhile, research shows that national laws and contracts routinely allow for disclosure of information as required by securities regulation. Petrobras, the Brazilian state-owned oil company, has confirmed to the SEC that, to the company's knowledge, none of the 30 countries in which it operates prohibits disclosure. Notably, Petrobras is active in Angola and China, countries that some companies have claimed would forbid compliance with the disclosure provision. It is in precisely the countries most reluctant to engage in voluntary transparency where this provision would be most valuable.

Claim: Only aggregate disclosures made at the country level provide useful information.
Fact: Information on payments made to governments at the project level—that is, at the level where companies and governments establish financial terms—allows investors to properly assess risk, governments to better track company compliance, and citizens to see the value placed on their natural resources.

The U.S. agency in charge of revenue collection on public lands has written to the SEC in support of Section 1504's reporting requirements, citing the importance of project-level information in measuring company compliance with lease terms. Reporting by project has also gained ground within the Extractive Industries Transparency Initiative (EITI), a global voluntary disclosure program: in both Indonesia and Mali, payments reported through EITI are identified by the concession they relate to.

Claim: Reporting by project reveals commercially sensitive information about a company.
Fact: The payment information required by Section 1504 simply does not constitute the stuff of trade secrets. Information on basic concession terms (such as bonus payments and royalty rates) is widely known within industry circles, while leases and their bid terms are made publicly available by many governments, including the United States. Nothing in the new U.S. law requires the publication of the sort of information (for instance on geological data or proprietary technology) that might qualify as commercially sensitive.

Further, major multinational oil companies already agreed this year, with little fanfare, to report payments project-by-project through Indonesia's EITI. Indonesia's new reporting standards for the oil and gas sectors require companies to report payments for each of their production-sharing contracts with the government; BP, Chevron, CNOOC, ExxonMobil, Hess, Talisman, Petrochina, Total, and ConocoPhillips—all companies covered by Dodd-Frank's reporting requirements—participated in the design and approval of Indonesia's EITI reporting forms.

Claim: Compliance with the reporting requirements will cost companies so much that the law cannot be implemented as written.
Fact: Oil, gas and mining companies are compelled to keep accurate books and records tracking information about payments to government, and in some countries, including the US, already report payment data to tax authorities at the project level. While some adjustments to company reporting procedures will be necessary, preliminary analysis from the SEC found that new rules will increase company compliance costs by a modest amount—0.3 percent.

This estimate is put squarely in perspective by the enormous profits enjoyed by six of the largest global oil companies: ExxonMobil, Shell, Chevron, BP, Total and ConocoPhillips. In just the first two quarters of this year, these companies made collective profits totaling $78.3 billion. Shell alone made $17.6 billion in the first half of 2011.

Regardless, a few companies have commented extensively on compliance costs in their attempts to undermine Dodd-Frank's biggest gains for transparency.

In a recent letter to the SEC, Shell requested that the Commission grant a number of ‘cost-saving' exemptions, including an allowance to report only those payments affiliated with "material" projects (which would mean the larger the company, the larger the project would have to be before related payments were disclosed.) But Shell's recommendation is not supported by the language of Section 1504 – which explicitly requires payment disclosure "for each project" – and would result in the publication of vastly less information than the law intended.

Similarly, the U.S. oil industry's lobbyist, the American Petroleum Institute (API), has suggested that the SEC disregard altogether the legislation's clear requirement for disaggregated reporting, because of "costs" that API alleges might otherwise negatively affect "every aspect of the economy."

Claim: The SEC has the discretion to selectively implement Dodd-Frank in deference to company cost concerns.
Fact: While cost is a critical consideration, the SEC has a mandate from Congress to develop rules according to the legal requirements established by Section 1504.

Shell and API have argued that a recent decision by the U.S. Circuit Court for the District of Columbia, Business Roundtable and Chamber of Commerce v. SEC, challenged this notion. But they overstate the relevance of the Circuit Court's decision as a precedent for rulemaking under Dodd-Frank. While the Court's decision in Business Roundtable focused on the SEC's exercise of its authority to engage in discretionary rulemaking, Section 1504 requires that the Commission "shall issue" specific project-based disclosure rules. This statutory order leaves the SEC little discretion to act otherwise, despite the apparent desire of some companies to approach the rulemaking process as an opportunity to overturn Congressional intent.

The real cost issue at hand is that oil, gas and mining companies continue to post record global profits even as governments in resource-rich nations struggle to stay solvent. Instead of attempting to turn back the clock on transparency, major companies should instead look to lead their industries in compliance with the new global standard established by Dodd-Frank.